Consolidating the titans
A proposed mega-merger between Time Warner and AT&T could run afoul of U.S. antitrust laws.
AT&T, a wireless phone company, recently announced a massive merger with Time Warner, a media and entertainment company that owns CNN, HBO, and Warner Brothers. The merger would amount to an 85.4-billion-dollar deal between the two companies. However, a transaction of that size has legal implications that could influence the likelihood of success. The Department of Justice Antitrust Division regulates mergers of this size, and the Federal Communications Commission may become involved if the merger includes broadcast licenses. The DOJ regulates deals that diminish competition among businesses, whereas the FCC can block a merger such as the one between AT&T and Time Warner if it is “not in the public interest.” A review of the proposed merger is expected to be completed before the end of 2017.
AT&T could avoid the involvement of the FCC if, as a condition of the deal, Time Warner unloaded its only broadcast station. Without the involvement of broadcast licenses, the FCC and its broad “public interest” test would not interfere with the transaction. In contrast, there is no way AT&T could pursue the merger without being approved by the DOJ. The merger between AT&T and Time Warner is known as a vertical merger, not a horizontal merger, making it less likely that the DOJ will halt the deal. In general, enforcement actions from government agencies are less likely for vertical mergers than for horizontal ones. Also, the number of enforcement actions can vary greatly from one administration to the next. For example, under President Clinton’s administration, 31 enforcement actions were brought, whereas only 7 enforcement actions took place under President George W. Bush’s administration.
AT&T must find a way to combine content and distribution in a way that it could not have previously done through contract alone.
A vertical merger occurs when an entity acquires a customer or a supplier, not a direct competitor, as in a horizontal merger. Section 7 of the Clayton Act prohibits both horizontal and vertical mergers, a legal distinction that was first held by the Supreme Court of the United States in United States v. E.I. du Pont de Nemours & Co. Prior to du Pont, the Court had not applied vertical mergers to the Clayton Act. Vertical mergers do not limit the number of actors in a particular market, but these relationships can have additional effects, such as limiting the available markets for suppliers to sell their goods or reducing the available supplies for buyers. Because Time Warner is a supplier for AT&T, the deal is considered a vertical merger. Since it is a vertical merger, the DOJ might only approve it with concessions and conditions to its implementation.
For a vertical merger to be profitable, the addition of the businesses must result in more value than what each business had separately. One famous method of increasing value through mergers is consolidation of market power, but that form of growth is a feature of horizontal mergers, where one entity is able to significantly increase its market share. In the case of AT&T and Time Warner, each business is in a separate market. To create more value from the combination of both businesses, AT&T must find a way to combine content and distribution in a way that it could not have previously done through contract alone.
AT&T has argued that the deal will result in greater innovation and new kinds of content for consumers. Having Time Warner, a content creator, as a part of AT&T will result in reduced contractual hurdles in creating content for the mobile experience. AT&T argues that using faster mobile networks to offer new content will create an alternative to cable and increase competition and choice for consumers. AT&T hopes to lower the cost for these services through advertisements, much like the specifically targeted advertisements used by Google and Facebook. Some scholars have concurred, arguing that the benefits of vertical mergers include improved product design, which can lead to lower prices and higher-quality products.
Critics of the deal have argued that AT&T is likely to engage in economic protectionism of its content, in which the company could restrict availability of Time Warner’s content to AT&T’s platform alone or AT&T could give Time Warner’s networks more strategic placement on channel lineups. If other distribution companies besides AT&T want access to Time Warner’s channels, such as HBO and Cartoon Network, the business entity will have to negotiate a license agreement.
The inclusion of a distributor and a content-producer into one entity is economically convenient for corporations; whether that convenience will result in lower costs for consumers remains to be seen.
Recent data from economic research on horizontal mergers by John Kwoka at Northeastern University illustrates these concerns. Kwoka’s study found that, after looking at over 1,000 mergers over the past 20 years, 80% of those mergers resulted in increased costs for consumers. The average increase in cost was around 7%. Kwoka also found that, in cases where the Federal government required merging entities to divest assets as a condition of the deal, the divestment “had almost no effect in preventing price increases.” One of the methods that federal enforcement agencies use to regulate vertical mergers is “conduct remedies,” an option that leads to an average increase in prices of 16%, according to Kwoka’s research. However, Kwoka’s findings are specific to horizontal mergers instead of vertical ones and it is not clear how generalizable the findings are to deals like AT&T’s acquisition of Time Warner. Kwoka’s research may cast doubt on the government’s ability to safely permit large mergers with conduct remedies. Part of the theoretical struggle among policy-makers on these issues is whether the effects of increased market power, or market share, are the true reasons for business success after a merger, or whether better success is due to increased efficiency.
The merger between the two companies is, in some ways, modeled after a 2011 merger between Comcast and NBC. In the NBC merger, the distributor (Comcast) purchased a content-producer (NBC). Similarly, Verizon (a distributor) previously merged with AOL and has a pending merger with Yahoo, a content producer. The inclusion of a distributor and a content-producer into one entity is economically convenient for corporations. Whether that convenience will result in lower costs for consumers remains to be seen. Historically, larger mergers such as the AT&T-Time Warner deal have resulted in diminished innovation and increased prices for consumers. Interestingly, Apple considered a merger with Time Warner earlier in 2016 but a deal failed to materialize.
In the wake of AT&T’s announcement, both presidential candidates weighed in on the deal. In particular, one of Donald Trump’s economic advisors issued a statement that Trump would never approve such a deal. Hillary Clinton has gone on record to state that she plans to increase the power and influence of the antitrust enforcement divisions of the DOJ and the Federal Trade Commission. The Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights announced that it will hold hearings on the proposed merger in November.
There is a theoretical split between the more modern theories of antitrust law, which focus on prices for consumers, efficiency, and innovation, and older antitrust theories that are primarily concerned with the concentration of power in too few hands. The more accepting modern view of vertical mergers stems from publications by Robert Bork, formerly a professor at Yale Law School, and Judge Richard Posner of the United States Court of Appeals for the 7th Circuit. The DOJ and the Supreme Court adopted the more modern interpretation during the Regan administration. However, with both presidential candidates releasing statements that are critical of the AT&T-Time Warner merger, it is possible that previously settled interpretations of antitrust law could change.
